Fiduciary Duties

George Michael Gerstein Interviewed by Fund Intelligence on GAO’s ESG Report

Noah Zuss of Fund Intelligence interviewed me, along with Jon Hale (Head of ESG Research at Morningstar) and David Blanchett (Head of Retirement Research at Morningstar Investment Management), regarding the practical effects of the GAO report and its relation to the DOL’s own recent ESG guidance in this developing area. The article can be found here.

George Michael Gerstein advises financial institutions on the fiduciary and prohibited transaction provisions of ERISA. As co-chair of the fiduciary governance group, he assists clients with tracking, and understanding, the numerous fiduciary developments at the federal and state levels, including the rules and regulations of governmental plans. He also advises clients with respect to the fiduciary duty implications of ESG investing.

Key Takeaways from the GAO Report on ESG Investing by ERISA Fiduciaries

The Government Accountability Office (GAO) yesterday released a new report on ERISA fiduciaries’ incorporation of environmental, social and governance (ESG) factors into its investment process. At 63 pages, here are the key takeaways:

  1. The report is focused only on instances where fiduciaries consider ESG factors as material risk factors that are part of an ordinary prudence analysis. In other words, the GAO did not focus on other strategies (e.g., impact investing), such as those that select an ESG factor for moral reasons, etc., which is the historical association of ESG investing. In this sense, the GAO deserves a lot of credit for focusing on this sophisticated approach to ESG.  You may recall that my paper on climate change risk focused on this very issue.
  2. Rather unfortunately, the report was largely completed prior to the DOL’s issuance of Field Assistance Bulletin (FAB) 2018-01, which we discussed here. The principal recommendation by the GAO is for the DOL to issue guidance on whether a fiduciary can incorporate ESG factors into the management of a default investment option in a defined contribution plan. As you may know, FAB 2018-01 seemed to do just that, though not in an entirely clear manner. Nevertheless, the GAO addressed FAB 2018-01 at the end of the report and narrowed its initial recommendation, namely, that the DOL better explain how fiduciaries can utilize the integration strategy in a QDIA. In the DOL’s defense, FAB 2018-01 seems to address (to some extent) whether a QDIA can utilize the integration strategy; the DOL instead hit the breaks on offering a themed ESG product as a QDIA.
  3. According to the GAO, the DOL is amenable to issuing additional guidance on ESG investing, provided there is enough interest by fiduciaries. The DOL is mum on its Form 5500 project, and whether any ESG disclosures on a revised 5500 are in the works.
  4. Those close to ESG will unlikely find anything surprising in the GAO report on the various reasons why ESG is not yet widely adopted by US retirement plans: questions over the reliability/comparability of disclosures, ratings and rankings–designed to help fiduciaries incorporate ESG factors–all continue to be cited as impediments. Regulatory uncertainty, and definitional ambiguities, also remain hindrances. I recently spoke on a number of these constraints to greater adoption by fiduciaries.

George Michael Gerstein advises financial institutions on the fiduciary and prohibited transaction provisions of ERISA. As co-chair of the fiduciary governance group, he assists clients with tracking, and understanding, the numerous fiduciary developments at the federal and state levels, including the rules and regulations of governmental plans. He also advises clients with respect to the fiduciary duty implications of ESG investing.

ESG Considerations for ERISA Fiduciaries

I recently moderated a panel for Fi360 called, “ESG Considerations for ERISA Fiduciaries.” Here is a link to the recording.

I was joined by Ali Caffery of Envestnet and Jason Blackwell of Mercer. Too many ESG panels either sidestep the fiduciary issues altogether or discuss them in such abstract terms so as to not be terribly useful. We took a practical approach and walked the audience through some of the key issues a fiduciary should take into account when considering an ESG strategy. We received really strong feedback. I want to thank again Blaine Aikin and his entire team for allowing us to speak on this important topic!

George Michael Gerstein advises financial institutions on the fiduciary and prohibited transaction provisions of ERISA. As co-chair of the fiduciary governance group, he assists clients with tracking, and understanding, the numerous fiduciary developments at the federal and state levels, including the rules and regulations of governmental plans. He also advises clients with respect to the fiduciary duty implications of ESG investing.

Live Blogging: ACA Compliance Group Spring Conference

I am here on Amelia Island, FL about to start our panel on fiduciary law developments: the SEC release (and what it means practically-speaking, the delta between adviser and broker-dealer duties, the issues around the new disclosures, etc.), the latest on the DOL Fiduciary Rule (FAB 2018-02, the Fifth Circuit decision, how firms should proceed with compliance), what is in store from state legislatures and regulators, and the recent DOL ESG guidance and how managers should view the guidance. There are over 200 attendees here and, based on questions I received last night, there is a real need for clarity on fiduciary governance at the federal and state levels!

George Michael Gerstein advises financial institutions on the fiduciary and prohibited transaction provisions of ERISA. As co-chair of the fiduciary governance group, he assists clients with tracking, and understanding, the numerous fiduciary developments at the federal and state levels, including the rules and regulations of governmental plans. He also advises clients with respect to the fiduciary duty implications of ESG investing.

David Grim, Larry Stadulis and George Michael Gerstein to Speak at Upcoming ICI General Membership Meeting on May 22 in Washington DC

Three members of Stradley Ronon’s new Fiduciary Governance Group will present at the Investment Company Institute’s 2018 General Membership Meeting on May 22 in Washington, DC. David W. Grim, Lawrence P. Stadulis and George Michael Gerstein will comprise the panel, “The SEC the DOL and the States: A New Fiduciary World,” where they will discuss rapidly developing fiduciary law developments at the federal and state levels.

Grim, most recently Director of the U.S. Securities and Exchange Commission’s Division of Investment Management, provides counsel on all aspects of investment management law. He assists clients with a unique perspective developed during his over 20 years of public service at the SEC, including his time as one of only a small number of people who has served as the top regulator of the asset management industry. Grim joined the Division of Investment Management in 1995 directly from law school and rose to become its leader. He developed regulatory policy and legal guidance for investment advisers and investment companies, including mutual funds, exchange-traded funds, closed-end funds, variable insurance products, unit investment trusts and business development companies.

Stadulis co-chairs the fiduciary governance group and advises clients in matters pertaining to the registration and regulation of investment advisers and investment companies under federal and state securities laws. He also manages related issues pertaining to investment advisers and investment companies, including matters involving ERISA, broker-dealer regulation and banking laws.

Gerstein co-chairs the fiduciary governance group and advises clients on the fiduciary and prohibited transaction provisions of ERISA. He counsels banks, trust companies, broker-dealers, investment managers, private fund (including hedge funds and private equity funds) sponsors, and advisers on their responsibilities under federal law when managing plan assets. George routinely advises clients on the DOL Fiduciary Rule and other fiduciary developments at the federal and state levels, and additionally, he counsels clients on fiduciary-like duties and restrictions under other laws, including federal and state banking requirements, and the rules and regulations of governmental plans.

George Michael Gerstein advises financial institutions on the fiduciary and prohibited transaction provisions of ERISA. As co-chair of the fiduciary governance group, he assists clients with tracking, and understanding, the numerous fiduciary developments at the federal and state levels, including the rules and regulations of governmental plans. He also advises clients with respect to the fiduciary duty implications of ESG investing.

Live Blogging: Times Sq. – What can we expect from the states now?

There continues to be significant interest in the dynamic legal environment concerning fiduciary status and obligations by plan sponsors and service providers. One great question my panel received was what to expect from the states in light of the SEC release. I answered that title reform in the SEC proposal may address some state legislature concerns and could slow the introduction/advancement of bills dealing with that issue, but enforcement at state level remains an ongoing risk. I also told the audience to be on the look-out for the Nevada regulations any day now.

George Michael Gerstein advises financial institutions on the fiduciary and prohibited transaction provisions of ERISA. As co-chair of the fiduciary governance group, he assists clients with tracking, and understanding, the numerous fiduciary developments at the federal and state levels, including the rules and regulations of governmental plans. He also advises clients with respect to the fiduciary duty implications of ESG investing.

Stradley’s Analysis of New DOL Guidance on ESG Investing Described as “Comprehensive” and “Measured”

This week’s U.S. Department of Labor (DOL) Field Assistance Bulletin (FAB) 2018‑01 on environmental, social and governance (ESG) investing seems to have both caught everyone by surprise and caused confusion amongst a good many. This is unfortunate because ESG, with its various connotations, already eludes some. But despite its shortcomings, FAB 2018-01 reflects an unease by the DOL over certain ESG practices and largely clarifies existing fiduciary obligations in this space. Here are our key observations:

  • ESG guidance issued by the DOL during the Obama administration in 2015 and 2016 was largely viewed as supportive of including ESG factors in the investment process. For example, Interpretive Bulletin (IB) 2015‑01 recognized that an ESG factor can in fact have a close nexus with investment performance, and, therefore, should be considered by a fiduciary like any other material investment factor (e.g., inflation risk) in the usual prudence analysis. This acknowledgement recognized the growing body of research linking ESG factors, such as climate change, with investment performance. In respect of climate change, for example, an issuer may now be facing numerous risks, including stranded asset risk, the prospect of heightened government regulation that disproportionally affects certain industries or sectors (and the resulting litigation) and even the risk that some companies or industries may be rendered obsolete as global markets search for solutions to what is called, the transition to a low-carbon economy. IB 2015-01 also restated the historical test for ESG investing: only when competing investment options serve the plan’s interests equally well may a fiduciary use an ESG factor as the tie-breaker. This historical approach, sometimes called the tie-breaker test, was designed to address the early iterations of ESG investing, where the fiduciary would want to pursue an objective unrelated to investment performance, such as to spur jobs in the local economy. In 2016, the DOL issued IB 2016‑01 in which it permitted plan-funded shareholder engagement if “the responsible fiduciary concludes that there is a reasonable expectation that [such engagement] with management, by the plan alone or together with other shareholders, is likely to enhance the value of the plan’s investment in the corporation, after taking into account the costs involved.” Issues on which engagement may be appropriate included “the nature of long-term business plans including plans on climate change preparedness and sustainability” and “policies and practices to address environmental or social factors that have an impact on shareholder value.”
  • FAB 2018‑01 preserves the notion that an ESG factor can have a direct link to investment performance and may be added to the investment decision mix with all other material factors, such as volatility and its correlation with other securities in the portfolio. But the DOL cautioned that there must in fact be a real nexus between the ESG factor and shareholder value in order to avoid having to satisfy the tie-breaker test. Fiduciaries will want to build a record in support of the view that a particular factor bears a relationship with investment performance, and carefully consider how much weight to put on that specific factor.
  • Though hardly clear, the DOL is seemingly still comfortable with fiduciaries populating plan investment lineups with an ESG-themed investment option, provided the fiduciary can justify its inclusion on prudence grounds. The DOL is definitely wary of a fiduciary’s selection of an ESG-themed QDIA, though FAB 2018‑01 does not completely close the door on such an investment product. Moreover, the DOL, in expressing skepticism of ESG-related QDIA products, distinguished between “ESG-themed funds (e.g., Socially Responsible Index Fund, Religious Belief Investment Fund, or Environmental and Sustainable Index Fund),” from funds “in which ESG factors may be incorporated…as one of many factors in ordinary portfolio management and shareholder engagement decisions.” The former seems to be more concerning to the DOL than the latter. This potentially has the effect of favoring some ESG products and strategies over others.
  • The DOL also zeroed-in on shareholder engagement in respect of ESG issues that have a connection to the value of the plan’s investment in the company, where the plan may be paying significant expenses for the engagement or development of proxy resolutions. FAB 2018-01 states that if “a plan fiduciary is considering a routine or substantial expenditure of plan assets to actively engage with management on environmental or social factors, either directly or through the plan’s investment manager,” then that may warrant “a documented analysis of the cost of the shareholder activity compared to the expected economic benefit (gain) over an appropriate investment horizon.” It is not evident why the DOL raised a concern over shareholder engagement that results in an ERISA plan incurring significant expenses due to direct engagement with company boards because we are not aware of that being much of a practice (at least as of yet). The DOL may have simply taken notice of other types of institutional investors, such as very large governmental plans, which are pushing for more engagement with corporate boards as an alternative to divestment, for example.

Even with FAB 2018-01, ESG remains an entirely viable investment approach under ERISA, provided it is structured in a way that satisfies the duties of prudence and loyalty. Fiduciaries face a proliferation of data and analytic tools to help identify managers and investment opportunities that are sufficiently attuned to ESG risks and best practices. Nomenclature and disclosure remain sources of concern and confusion among ESG specialists and newcomers alike. ESG’s historical association with the pursuit of objectives unrelated to financial performance give the DOL and some fiduciaries pause, but a more nuanced understanding of how ESG factors can shape a portfolio’s performance is emerging apace.

George Michael Gerstein advises financial institutions on the fiduciary and prohibited transaction provisions of ERISA. As co-chair of the fiduciary governance group, he assists clients with tracking, and understanding, the numerous fiduciary developments at the federal and state levels, including the rules and regulations of governmental plans. He also advises clients with respect to the fiduciary duty implications of ESG investing.

Live Blogging: 401(k) Governance in Dallas

I just finished speaking on fiduciary governance issues facing 401(k)/403(b) plan sponsors and service providers. We got everyone up to speed on the DOL Fiduciary Rule litigation, the SEC release, litigation trends, ESG and best practices from a plan committee standpoint. Approx. 90% of those surveyed have an IPS, which is great and tells me that the audience is representative of the plan community at large. I was joined by Jeffrey Barrow (Dimeo Schneider), Chris Jarmush (Arthur J. Gallagher) and Greg Ungerman (Callan) at the Pensions & Investments 401(k)/403(b) Investment Lineup.

George Michael Gerstein advises financial institutions on the fiduciary and prohibited transaction provisions of ERISA. As co-chair of the fiduciary governance group, he assists clients with tracking, and understanding, the numerous fiduciary developments at the federal and state levels, including the rules and regulations of governmental plans. He also advises clients with respect to the fiduciary duty implications of ESG investing.

Lawrence Stadulis quoted in ACA Insight on Advisers Act

The issue contains a number of articles addressing an adviser’s federal fiduciary duty and other obligations under the Advisers Act in which Stradley Ronon Partner and Fiduciary Governance Group Co-Chair Lawrence Stadulis is quoted.

©2018 ACA Insight and ACA Compliance Group. All rights reserved. Reproduced with written permission of the publisher.

George Michael Gerstein advises financial institutions on the fiduciary and prohibited transaction provisions of ERISA. As co-chair of the fiduciary governance group, he assists clients with tracking, and understanding, the numerous fiduciary developments at the federal and state levels, including the rules and regulations of governmental plans. He also advises clients with respect to the fiduciary duty implications of ESG investing.

ESG & Derivatives: Like a Razor

George Michael Gerstein advises financial institutions on the fiduciary and prohibited transaction provisions of ERISA. As co-chair of the fiduciary governance group, he assists clients with tracking, and understanding, the numerous fiduciary developments at the federal and state levels, including the rules and regulations of governmental plans. He also advises clients with respect to the fiduciary duty implications of ESG investing.